Barbara L. Gasper - Executive Vice President & Group Executive Ajay Banga - President & Chief Executive Officer Martina Hund-Mejean - Chief Financial Officer.

Tien-Tsin Huang - JPMorgan Securities LLC Robert P. Napoli - William Blair & Co. LLC Moshe A. Orenbuch - Credit Suisse Securities (USA) LLC (Broker) Thomas McCrohan - CLSA Americas LLC Andrew Jeffrey - SunTrust Robinson Humphrey, Inc. Smittipon Srethapramote - Morgan Stanley Craig J.

Maurer - Autonomous Research US LP David Togut - Evercore ISI Christopher C. Brendler - Stifel, Nicolaus & Co., Inc. William Carcache - Nomura Securities International, Inc. James Schneider - Goldman Sachs & Co. Bryan C. Keane - Deutsche Bank Securities, Inc..

Good morning and welcome to MasterCard's second quarter 2015 earnings conference call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Barbara Gasper, Executive Vice President of Investor Relations..

Thank you, John. Good morning and thank you all for joining us for a discussion about our second quarter 2015 financial results. With me on the call today are Ajay Banga, our President and Chief Executive Officer, and Martina Hund-Mejean, our Chief Financial Officer.

Following comments from Ajay and Martina, the operator will announce your opportunity to get into the queue for the Q&A session. Up until then, no one is actually registered to ask a question. Even if you think you have already dialed into the queue, you will need to register again following our prepared comments.

This morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website, MasterCard.com. Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP equivalents.

These documents have also been attached to an 8-K that we filed with the SEC earlier this morning. A replay of this call will be posted on our website for one month.

Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about MasterCard's future performance. Actual performance could differ materially from what is suggested by our comments today.

Information about the factors that could affect future performance are summarized at the end of our press release as well as contained in our recent SEC filings. With that, I will now turn the call over to Ajay..

Thank you, Barbara. Good morning, everybody. Our business continues to perform well with good volume and good transaction growth as well as the signing of a number of new deals. And as you all know, that's despite the mixed economic environment we're all navigating through.

After we adjust for currency headwinds, our net revenue grew 7%, which is exactly in line with our expectations. And, as you know, executing on our strategy over the last few years has included our acquiring a number of businesses, and in fact, that accelerated over the past year or so.

And they are having a slight drag in our bottom line until we get them fully integrated. As we do this, we are very closely monitoring our organic expense growth to help fund these integrations, and that close care has delivered EPS growth of 15%.

That of course excludes the impacts of currency translation and a special item related to litigation that we will touch on later during the call. I'm going to just briefly touch on global economics this quarter. And overall, the environments in the U.S. and Europe have continued to improve, as key economic indicators remained healthy. But the U.S.

consumer is still not spending all of their gas savings. Latin America and Asia-Pacific remain challenged, most notably in Brazil and in China, and our business continues to be impacted by the strong U.S. dollar. But our fundamentals remain strong, with double-digit volume and transaction growth in spite of these economic situations.

So before we go to our business highlights, let me quickly update you in China. Two weeks ago, the Chinese regulator issued a draft version of the guidelines for review and for comment.

They're going to need further clarity on some of the details there that are connected to domestic switching operations, and I'm assuming that will probably happen when the final regulations are issued likely later this year.

In the meanwhile, what we are doing is working on all fronts, issuing, acquiring, and on-soil processing so we can try and take advantage of this opportunity as we get further clarity.

Based on everything we know today, we continue to believe what we told you earlier; that we would be technically ready to process domestic Chinese transactions by the end of 2016. So let's move on to some of our recent business activity.

And during the quarter, we signed a number of new agreements and renewals around the world, and I'm going to pick three of four examples. So in the UK, we signed a new agreement with Virgin Money to convert their debit card portfolio to contactless-enabled debit MasterCards.

And that deal now gives us 100% of Virgin Money's existing proprietary debit and credit book. In the U.S., we continue to grow our debit businesses by signing now, for example, a new agreement with TD Bank to convert their PIN debit card portfolio to preferred MasterCard routing. In the U.S.

as well, we have several co-brand credit renewals, Ann Taylor, Barnes & Noble, Brooks Brothers, [Fred] Meijer, and Spirit Airlines. And so moving beyond all these specific customer agreements, I'm going to talk about a couple of topics.

And the first one is we are significantly investing in cybersecurity-related technology to offer much greater protection to our cardholders, to merchants, to issuing banks. And there is no silver bullet to completely eliminate fraud.

But if you apply a sensible multi-layered approach that has some coordination across the industry, we are all convinced we can help to significantly reduce that risk. And protecting card credentials through EMV, through SecureCode, and now through tokenization are only a few examples of our efforts in this area.

We've actually recently announced the expansion of our tokenization services to private label card issuers, and we're the first data network to do so for BJ's Wholesale Club. Kohl's and JCPenney will be among the first retailers use these services later this year.

We also partnered with Synchrony Financial and Citi Retail Services, and these are two of the largest private label issuers in the U.S., to enable the use of their private label cards in participating mobile payment and digital wallet services.

Another area of focus in this space is safety as well as using biometrics to further protect the consumer's identity. And you've all seen news stories on pilots we are doing where consumers use an app on their smartphone to verify their identity for online transactions by taking a selfie.

For those of you attending our Investor Day in September, you can take 100 selfies each and see this technology in person. Another example is SafetyNet.

As many of you saw demonstrated at last year's Investor Day, we are actually working closely with many providers, including people like CrowdStrike and FireEye to share broader cyber threat information. But the thing is with SafetyNet, it's not just about sharing the information.

We don't just detect threats, but we act upon them in real time by providing an independent layer of security on behalf of our issuers globally. In 2014, for example, SafetyNet detected and stopped several confirmed fraud events, including two where forensics determined that the issuer exposure could have been roughly $80 million.

So SafetyNet's unique solution is now being deployed globally across all products, all channels. And over the past two years since launch, more than 80% of our issuers are now using this service. Remember, not just to share the information, but to act upon that in real time. Another topic of interest is how acquisitions fit into our overall strategy.

So as a reminder, our M&A focus areas include loyalty, data analytics, processing, and safety and security.

Now because these areas are all of strategic importance to us, our belief is that any transaction we do there has to stand on its own in terms of contribution, but it's also, most importantly, got to provide ways for us to cross-sell their capabilities in a bundled way with existing MasterCard products and services, what we talk about as the multiplier effect.

So today I'm going to talk a little bit about what these acquisitions are doing, some of them at least, in combination with the rest of MasterCard. First of all, anything we acquired before 2014 such as DataCash and Access Prepaid is now already embedded in our base numbers.

These acquisitions have been extremely helpful in expanding our business and revenue growth, and as I mentioned, just how both on their own but also as combined with our existing products. And let me give you one example from each of DataCash and Access.

By combining our acquisition of DataCash with our previously existing gateway services in Asia-Pacific and then our recent acquisition of TNS [Transaction Network Services], we have built one of the few global e-commerce gateway solutions available.

And that combined solution is enabling us to get closer to acquirers, closer to merchants, more recently deploy our innovations with them, and protect their digital transactions with what I think are extremely robust fraud and risk management solutions.

So for example, we now have over 120 relationships with acquirers around the world, and we are providing integrated product offerings directed at merchants such as an omni-channel solution for H&M in the UK. DataCash is also enabling us to more easily deploy innovations like MasterPass.

We've added MasterPass to the Boots drug store chain website in the UK. We just quickly connected over 2,000 merchants in just a few days for the Commonwealth Bank of Australia, all these enabled through DataCash.

Another example H.I.S.; that's Japan's leading travel company, is using DataCash's fraud management solution to enable safe online sales in Malaysia and in Indonesia. Access, in 2013 Access Prepaid helped Qantas upgrade its frequent flyer program to include the Qantas Cash multicurrency prepaid card.

And just recently, that Qantas Cash surpassed A$1 billion in sales. It's added almost 10 million transactions processed by MasterCard since launch.

And that, by the way, is just one of many currency prepaid cards in a number of verticals that have launched around the world using the program management capabilities of Access Prepaid combined with our prepaid product capacity and our selling skills in the regions. So let's get to talk about acquisitions we've done over the past 18 months.

And those, by the way, are the ones we include when we call out acquisitions in our numbers. Remember, we only exclude acquisitions from our base for up to two calendar years. And that means that by the end of this year, of the acquisitions made recently, only Applied Predictive Technologies, APT, will continue to be excluded in 2016.

So a few examples of how some of these newer acquisitions are supporting our strategy. In February 2014, we added substantial software engineering capacity and capabilities in the digital and mobile payments area with the acquisition of C-SAM.

That's allowing us to accelerate the development and the expansion of MasterPass and other mobile payment solutions. And just this morning we've announced the launch of MasterPass in India, bringing the total number of live markets to 24.

And on the merchant side, we've added Alitalia, South African Airways, Carnival Cruise Lines, WestJet in Canada, and a host of others.

In May 2014, the acquisition of ElectraCard Services, ECS, expanded our development capabilities and that enabled us to provide lower-cost authorization and clearing services as well as a suite of platforms that enable local issuer processing or local acquirer processing services.

As one example, ECS's technology was what we used to open our processing center in Dubai last year. So C-SAM in combination with ECS now provides the backbone of our technology hub in India. With our large team of talented technologists, we have a wealth of creative ideas.

That tech hub is playing a very important role in creating and supporting innovative digital payment technologies that we're now using around the world. On the loyalty front, we acquired Pinpoint last year. That's the premier loyalty provider in Australia. We're now expanding that across Asia-Pacific.

Pinpoint enables us to offer value-added solutions to issuers, to merchants and to consumers. And an example is the recent agreement with Cuscal in Australia, who will not only be converting their consumer credit business to MasterCard, but while doing so are adding Pinpoint's loyalty solutions.

Another example, this one in the merchant space, is that we recently won a deal with Dick Smith Electronics in Australia. And this deal combines the Pinpoint redemption network for their gift cards. We add MasterPass to their website, we provide Advisors analytics to support their business.

And yet another example of using loyalty to address merchant needs and then including additional MasterCard services to help them in other ways. And finally, our most recent acquisition is APT, Applied Predictive Technologies. That's the leading cloud-based analytics company in the information services area.

Their Test & Learn platform combined with our anonymized transaction data and Advisors analytics capabilities is what enables us to advance our ability to deliver differentiated products to issuers as well as to merchants and to expand our reach beyond our traditional client base.

And in fact, just a few weeks after the acquisition, APT's access to our expanded client base has already resulted in a number of wins, and I'm going to call out two of them. The first is with BancoPosta in Italy, where APT's platform will be used to test the promotional effectiveness of their loyalty scheme.

The second one is with a leading Canadian retailer to help them address some of their key business challenges. So why am I saying all this to you about acquisitions? Because we recognize that for each acquisition, there's a certain amount of effort, a certain amount of investment.

But we are clearly seeing the benefits that come from them in our engagements with clients, particularly when you look at adding their capacity to the services and capability that MasterCard already provides. So with that, let me turn the call over to Martina for going into our financial results and operational metrics.

Martina?.

Thanks, Ajay, and good morning, everyone. So let me begin on page three of our slide deck, where you see the difference between non-GAAP reported and FX-adjusted growth rates for this quarter. The differential continues to be primarily driven by the euro-U.S. dollar exchange rate.

And these figures also exclude the impact of a special item taken this quarter related to a settlement we made with Tesco, the largest merchant involved in the UK merchant litigation case. So you can see EPS growth was 6% or 15% after adjusting for currency.

Continued revenue momentum, good cost control and executing on our tax strategies and current share repurchase program all contributed to that performance. I'd like to point out a few items here and then I'll talk about the major P&L line items in subsequent slides.

First, as expected, acquisitions that we made in 2014 and 2015 drove $0.03 of dilution. Second, the tax rate was favorable at 25.8% in the quarter, primarily due to our continued focus on better aligning our tax structure with our business footprint. Third, share repurchases contributed $0.02 per share to our second quarter results.

As of July 22, we have $2 billion remaining under our current authorization. Lastly, cash flow from operations was $821 million. We ended the quarter with cash, cash equivalent and other liquid investments of about $5.1 billion. So let me turn to page four, where you can see the operational metrics for the second quarter.

Our worldwide gross dollar volume, or GDV, was up 13% on a local currency basis, up from last quarter. Overall, our U.S. GDV grew 7%, made up of credit and debit growth of 7% and 8%, respectively. Total U.S.

GDV was up 1 ppt versus last quarter, primarily due to our consumer credit programs and partially offset by the continued 2 ppt headwind from lower gas prices. Outside of the U.S., volume growth was 16% on a local currency basis, up from last quarter and primarily driven by Europe.

Cross-border volume grew 17% on a local currency basis, lower than the 19% we saw in the first quarter, down slightly in all regions except the U.S. Of particular note, growth in Europe remained strong, in the low 20%s, with the United Kingdom, Italy, Germany and Sweden as key contributors.

Turning to page five, you can see here processed transactions grew 13% globally to 12 billion. We continued to see double-digit growth in most regions. Growth increased from the 12% we saw in the first quarter, primarily due to the U.S. and Europe. And globally the number of cards grew 8%, with 2.2 billion MasterCard and Maestro-branded cards.

Now let's turn to page six for highlights on a few of the revenue line items. Net revenue growth was 1% as reported or 7% FX-adjusted given currency headwinds and in line with our overall expectations.

Looking at the components of net revenue, gross revenue increased 12% FX-adjusted, but we saw 28% growth in rebates and incentives, primarily due to the expected higher upfront incentive amortization from recently renewed contacts that we told you about. And additionally, the impact of local currency exchange rates was a 2 ppt headwind.

Acquisitions contributed a little bit more than 2 ppts to net revenue growth. Looking quickly at the individual revenue line items on an FX-adjusted basis. First of all, domestic assessments grew 9% while worldwide GDV grew 13%. This 4 ppt gap is primarily due to the impact of local currency somewhat offset by pricing.

Cross-border volume fees grew 9% while cross-border volume grew 17%. Of the 8 ppt gap, the majority is due to higher mix of intra-Europe activity as well as some local currency impact. Transaction processing fees grew 12%, primarily driven by the 13% growth in processed transactions. Finally, other revenues grew 29%.

While primarily driven this quarter by our PinPoint acquisition, our advisor business and our safety and security products and services continued to contribute to the growth of other revenue. Moving on to page seven, here you can see total operating expenses after excluding the special item increased 9% in the quarter or 14% on an FX-adjusted basis.

Of this, M&A activities contributed 10 ppts to total FX-adjusted expense growth, which is in line with what we have been expecting. The remaining 4 ppts was due to organic growth. We've modified the line at the bottom of our standard presentation chart to make it easier for you to compare the growth rates including and excluding M&A activities.

As a reminder, the only acquisitions that we call out here are the ones that we did in 2014 and 2015. Most of our expense growth is in G&A.

while the savings from our restructuring efforts essentially offset much of our reinvestment activities, the remaining growth was primarily due to the continued increase in our transaction processing activities, driving higher data processing expenses.

Data processing is also the line item in G&A where we are beginning to see the impact of paying the new local Russian processor, or NSPK, for processing domestic transactions. You can also see that most of our D&A expense growth is related to acquisitions, in particular the amortization of intangibles.

Turning to slide eight, let's discuss what we have seen in July through the 21st. Most of our business drivers are showing a higher growth rate compared to what we saw in the second quarter. The numbers through July 21 are as follows. Starting with processed volume, we saw global growth of 13%, up from the 11% in the second quarter.

In the U.S., our processed volume grew 7%, up two PPT from what we saw last quarter, even after a continued 2 ppt headwind from lower gas prices. And we saw an increase in both our credit and debit programs. Processed volume outside the U.S. grew 20%, also up about 2 ppts from the second quarter, with higher growth in every region.

Globally, processed transaction growth was 14%, up 1 ppt from what we saw in the second quarter, with double-digit growth in all regions except the U.S., which grew in the high single digits. And with respect to cross-border, our volumes grew at 19% globally, up 2 ppts from our second quarter growth.

All regions were up in July except for the U.S., which was essentially flat. However, we did see a continued uptick in volume from the U.S. to Europe that began during the second quarter. Looking ahead, here is some commentary about full-year 2015. Let me start by summarizing our thoughts about FX. And remember, the currency impacts us in two ways.

So first of all, we have the impact of our functional currencies, the euro and the Brazilian real, relative to the U.S. dollar, and this is what we refer to as FX-adjusted. While the real has continued to depreciate versus the U.S. dollar since our last earnings call commentary, the euro decline has somewhat stabilized.

Second, we have the impact of local currency rates relative to their functional currencies, and the impact of this is already included in our FX-adjusted guidance. Our view for both of these factors hasn't changed since our last earnings call despite movements in several individual FX rates. So let me summarize.

For the functional currency translation impact, the first FX factor I just mentioned, we continue to expect the net impact of the euro and the real would be a 6 ppts to 8 ppts headwind to our as-reported results for the full year depending on what line item we are talking about, so revenue, net income, or EPS.

And this assumes the euro continues trading at the $1.10 level and the Brazilian real at the BRL 3.35 level for the rest of the year.

And for the local to functional currency impact, so this is the second FX factor that I mentioned, we continue to expect a net headwind in the 2 ppt range throughout the year both to revenue and the bottom line based on current rates. Now let's move on to some of the individual P&L line items.

And as you can see from our volume and transaction metrics, our underlying business remains strong, and little has changed in our 2015 outlook versus what we said back in April. On an FX-adjusted basis, we continue to expect high single-digit net revenue growth for 2015, including roughly two PPT from acquisitions.

And on an as-reported basis, the net revenue growth rate will still likely be in the low single-digit range as a result of roughly 6 ppt FX headwind, primarily from the euro functional translation, and that's based on current rates.

Moving to rebates and incentives, we continue to expect the full-year 2015 growth rate to be similar to the growth rate that we saw in Q1. The higher growth rate that we saw in Q2 will continue into Q3 before coming down in Q4, and that's due to the expected timing of some deals. We're looking at total operating expense.

We are now contemplating what investments we will need to make in China as the domestic market opens. While these will occur over the next couple of years, we will start investing in the next few months, and we have not previously factored that into our thinking around 2015 operating expense.

So we are now projecting the growth rate for total operating expense for full year 2015 to be in the high-single digits on an FX-adjusted basis, up just slightly from our earlier view.

Our full year continues to include a roughly 7 ppt impact from acquisitions and as-reported growth will now likely to be mid-single digit range after continuing to expect a roughly 4 ppt tailwind from the euro and the real translation.

We continue to project total EPS dilution will be about $0.11 to $0.13 for the full year 2015 from our recent acquisitions, including APT which closed back in May. And less than half of the expected dilution is due to the amortization of acquired intangibles.

You should now assume a full-year 2015 tax rate of about 27% due to the continued benefits we have seen so far this year. So to summarize, solid fundamentals continue to drive our underlying business in 2015 despite the mixed economic environment.

Our expectations for headwinds from FX have not changed from what we said back in April, and we are still winning new business and managing our overall expenses prudently. Finally, let me move on to our long-term performance objectives. First, I know many of you continue to ask when we will be rolling our performance objectives forward.

We will provide you with our new long-term objectives at our Investor Day in September. So for the 2013 to 2015 period, our performance objectives remain unchanged from what I have said on our last earnings call. Given our expectations for 2015 revenue growth, we expect to deliver at the low end of our 11% to 14% net revenue CAGR.

We continue to expect at least 20% EPS CAGR for the three-year period due to the continued expense management as well as benefits from our lower tax rate and share repurchases. And we remain committed to our annual operating margin target of at least 50%.

Remember, these objectives are on a constant currency basis and exclude the M&A activity that we just talked about as well as any new ones that might occur this year. Now let me turn the call back to Barbara to begin the Q&A session.

Barbara?.

Thank you, Martina. We're now ready to begin the question-and-answer period. And in order to get to as many people as possible, we ask that you limit yourself to a single question and then queue back in for additional questions.

John?.

Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Tien-Tsin Huang from JPMorgan..

Great. Good morning. I wanted to ask on the revenue, I guess. So year-to-date running 7% to 8%. I think you said 7% was right in line with your forecast. So I know a lot of moving pieces, but just curious, maybe you can remind us what's weighing on the revenue growth year-to-date from your longer-term objectives in the double-digits.

I'm just trying to parse out what the headwinds are that should ease longer term. Thanks..

So, Tien-Tsin, good morning. There really are a couple of factors in that when you look at the FX-adjusted revenue, which is the 7% for the second quarter, and by the way the factors were the same in the first quarter. Two I want to call out.

One is the incentives that we are now running through our P&L, which is really related to a couple of very large agreements that we had announced earlier. And the amortization that is running through our P&L is no different than we assumed.

And, of course, this is the first year where you would be running that in, so you're not going to have a lapping effect in that respect for the next year. The second factor that is still with us in some fashion is the deconversion from the Chase portfolio. So that is also going to end at the end of this year..

And, Tien-Tsin, remember that inside that 7% is the other 2 ppts of local currency impact of the currencies that are not what we call functional, meaning everything outside the euro and the real. Now, who knows where that will go longer term, but that's also something that we hadn't seen in the year or two earlier.

So we've got these three things going on. We've got the front-ended loading of the incentives of some of these large deals. We've got the whole aspect of this 2 ppts of foreign exchange translation outside the euro and the real that are running through.

The Chase portfolio is almost gone, but it runs through as a lapping effect to work until the end of this year. And that's three things we're dealing with. That's why you see the underlying gross volume is where you would think it would be, though the rebates and incentives combined with the 2 ppts in FX tend to pull things backwards.

That's what's going on..

Got it. Thank you..

Our next question comes from the line of Bob Napoli from William Blair..

Thank you and good morning. I was wondering, Ajay, if you could comment on the Visa – potential acquisition of Visa Europe and what that would mean, what that could mean for your European business. The revenue yield at Visa Europe is very low-high single digits.

I'm just wondering if you could maybe give some thoughts on how your revenue yields compare and what you think having Visa Europe as a for-profit company would mean..

There are a lot of implications of what happens if and when Visa actually completes that activity. And if they do, there are implications on pricing and yield. So the question you're getting at and there are implications of how long it will take for them to put the companies together.

We've done the Europay acquisition quite some years ago and integrating that into MasterCard did pose some amount of challenges in terms of the cultures of the two companies. You've also got the technology to be brought together.

Remember that simple things like V.me and Visa Checkout are two different things and that goes into their credit and debit technologies and there's going to be a lot of stuff to be done. But let's get past all that and assume all that gets done over a period of time.

Back to your yield question, MasterCard Europe's yield is higher than the Visa Europe yield, but it is lower than our MasterCard Global yield. Now, there are two or three caveats I'd like to put into your mind around that before you conclude that means our yields will go up if Visa were to be in Europe a more rational pricing competitor.

The first caveat is yields in Europe generally tend to be lower. Why is that? That's because it's a heavier mix of debit, other than maybe in the UK and Spain, but most of continental Europe is heavier weighted to debit.

We also process, both us and Visa, fewer transactions as a percentage because of all the competition from the old legacy domestic processors, particularly in debit, across the European countries. Now, you know there are breakthroughs happening in that space to increase the ratio of transactions we're processing.

Today, we are processing just a little under 40%. Now, that's higher than we used to, but it's still only 40%. So when you process less and there's more debit, you get a naturally lower yield in the system.

The second little caveat, which is an important one as well, is that MasterCard Europe, when I said our yield is higher than Visa Europe but lower than MasterCard as a whole, MasterCard Europe includes Eastern Europe and Russia. Visa Europe does not do that.

And so you've got to be a little careful about assuming the numbers across MasterCard Europe and Visa Europe. You may be comparing chalk and cheese a little bit there. And the third part is you know all the regulatory change that's happening in Europe with what's going on with the interchange, and interchange doesn't directly impact network revenues.

We've shown that time over time in every region around the world. But the fact is trying to go back to an issuer during a time that their own P&L is being compressed by lower interchange, dramatically lower interchange, I think that's going to be a little more challenging for pricing.

So even today our pricing is higher than Visa Europe's and that's why our yield is higher. They're gaining share even in that period of time. I'm not quite sure that if they do get in, they do buy it, what their pricing logic would be.

If their pricing logic is to be more rational and raise it a little bit to come closer to us, that may give us a little more flexibility. But I'm going to wait and watch before I conclude anything. Meanwhile, for us it's business as usual in Europe. They're pumping away growing share. You've heard Martina talk about our volume and our trends in Europe.

We're actually trying our best to keep that business growing the way it should. We still think it's a very attractive growth business for our company in the years to come..

Thank you..

Our next question comes from the line of Moshe Orenbuch from Credit Suisse..

Great, thanks. Ajay, you talked a little bit about some of the co-brand renewals that you secured.

Can you talk a little bit about the outlook over the next several quarters, both from the standpoint of what you've got in terms of the size of what is out there to renew and then also maybe what you see at your competitors that might be a chance to get some new business?.

Sure. Look, the co-brand business is becoming where everybody suddenly got focused on. And it's always been a relatively competitive space. And some parts of it have gotten more competitive, others less so. My general opinion has been most co-brands are decided relatively rationally.

There is a great discussion on pricing that's normally the starting point, as you would expect. But I do find that there is an intelligent conversation about the value you bring to the merchant and the issuer and the consumer of that co-brand in the process of being the network on that co-brand.

So if the merchant issuer feels or the bank issuer feels that this is going to be an opportunity for them to build a stronger, closer relationship with some aspect of their consumer book, you tend to benefit from that, whether it be through analytics, through things like our Advisors book, or it be through safety and security or it be through loyalty and rewards.

All those tend to patch together. And in fact, just the pricing of clearing, authorizing and settlement is literally just an entry point.

And a lot of what you're seeing us do in our acquisitions is to build out the capacity of the company's existing assets to connect into some of these edge of the network assets and become more than just what we used to be 10 years ago. That's what we're trying to do.

And that impact will help us over time with co-brands, not just in the U.S., but also with proprietary books and also enable us to build more stable revenue streams, even as competition keeps coming into different parts of our existing revenue stream. That's a longer-term picture. It's not three, four quarters.

I'm really talking out three, four, five, six years of how to think about the company for its future. Specific deals in the U.S. and elsewhere, there are a ton of them that keep coming up. Every quarter there are co-brands up. There are some small ones, some big ones. We are playing for all of them.

And some of them continue to make sense to us and some of them are at a point of time when they don't make sense. Then Martina and I go and hide in a room and run away from the numbers. That's what we do..

Thanks very much..

Your next question comes from the line of Tom McCrohan from Sterne Agee (sic) [CLSA] (38:21)..

Yes, following up on the co-brand question – and I'm with CLSA, not Sterne Agee. When does a co-brand deal not make sense? If you can, give us some thoughts around how you think about that..

When it no longer makes sense? I don't how to give you a specific item or a number or thinking. But honestly, I look at it from many different ways.

I look at the pricing and the yield for sure, but I look at it in every aspect of the ecosystem, issuer pricing, acquirer pricing, what you would get out of incremental volumes, what you'd get out of selling other value-added services, put the whole thing together. That, by the way, is true not just of co-brands. It's true of every deal we do.

And we don't approach co-brands very differently from any other deal we do. We approach it with the same pricing discipline that we approach for any deal. And that's been our rules now at least since I've been here. I'm pretty certain that's how my predecessor used to look at them too..

Next question, please?.

Our next question comes from the line of Andrew Jeffrey from SunTrust..

Hi, good morning. Thanks for taking the question. Ajay, I wonder if you can comment strategically on MasterCard's acquisition approach. It sounds like you've gotten a lot more aggressive in areas that you called out in your comments in terms of trying to build out MasterCard's capabilities.

Should we anticipate this as ongoing? I'm thinking from the perspective not only of competitive differentiation but also the impact on any given period's financials as you look out into the future.

Is this from a capital allocation perspective a shift in MasterCard's overall strategy, or is what we're seeing more opportunistic in nature right now?.

So, Andrew, from a strategic point of view, I think what you're seeing us doing is that we got a lot more clarity over the last four or five years in terms of where we want to strategically play, and these are the areas that Ajay has actually called out. And then what we did is we went to work and actually looked at the areas.

We looked at them organically and what can we actually build. We looked at whether we can partner with people, and then we also looked at what kind of companies and skill sets are out there that we could potentially purchase. And I think you see the culmination over the last 18 months of all of that work, putting it together.

We're looking at these acquisitions always first strategically.

Do they fit with MasterCard? Will they expand our business? Will they be catering to the multiplier effect that Ajay was mentioning? That means not only putting their skill sets into our business but combining it with what we have and actually getting more out of it, so we looked at all of this.

And then of course, we looked at does it culturally make sense? Can the companies work together, as well as does it make financially sense? All of those three criteria we really have not changed. And when you look at our comments about capital deployment, again, we haven't changed those at all.

We said first, we would be investing organically in the business. Second, we would be looking in these particular areas that are of strategic importance to us for acquisitions. And lastly, we are giving cash back to the shareholders. So you should not attribute any change in terms of what we're doing..

As far as the future is concerned, I hate to tell you that you should think about this dilution versus that dilution. At the end of the day, when I came here six years ago, we started this work around that time. And it happened that for the first three or four years, we only found a couple of deals that fitted into what we were trying to do.

And at that time what we were trying to do was what led to DataCash and Access Prepaid. Why was that? DataCash was like the e-commerce gateway. Remember, e-commerce six years ago was the thing that everybody was talking about growing into. We wanted to make sure we had the right connectivity with acquirers and merchants by building that in.

We had our own gateway in Asia. We folded this with that, added the TNS gateway, and now we've got a pretty decent sized global gateway business. It has strengths and weaknesses. It's not strong enough in the U.S. It's stronger in Europe and Asia. We're trying to build it out. All that's going on.

Access Prepaid was because we were the minority players in prepaid, and we wanted to grow in prepaid. We saw it as a growth opportunity. One of the things we saw in there was if you owned a prepaid program manager, it connected valuable prepaid business and allowed you to grow your footprint.

And lo and behold, five years later we have done very well in prepaid. We are one of the leading brands, if not the leading brand, by the end of this year in prepaid, and that's been helped partly by Access Prepaid.

As we moved along and we became clearer about where the future revenue streams would come from for continued growth, that's when we said let's focus on these bundled services, loyalty, safety, security, processing to see the data, connected to advisors and analytics. And as we built our confidence, we have kept looking at the deals.

We looked at a ton of deals and chucked them out the door because they didn't fit one of those three criteria that Martina talked about, cultural fit, connectivity to our existing products and services, financial sense. But then along came timing-wise a bunch of deals that just enabled us to do this a lot last year.

Now it's been five months this year, we've done APT basically and one of the smaller ones, but it just depends on the year. So I'd be loath to give you a forward-looking idea about what this could look like. I just don't think I could predict that to you.

But you should know that we will be acquisitive if it fits those three ideas and if we feel we can absorb it, and that's what we're trying to do..

Great, thank you very much..

Our next question comes from the line of Smitti from Morgan Stanley..

Yes, hi. Good morning, Ajay. Good morning, Martina. My question for you guys, I just was wondering if you guys could give us an update on your views on the legal and regulatory risks in Europe and in the U.S. Earlier this month there was some news out from the EU.

And then over the past week there was some news out that the merchant litigation agreement in the U.S. could be facing some issues, too..

Look, the news item on the merchant litigation in the U.S., we've been aware of the article, we are aware of the underlying issues. If those allegations are true, clearly these lawyers have displayed conduct that's pretty disappointing. But to be clear, they were not the principals only involved in that whole settlement.

There were lots of regulatory people involved. There was great close involvement by the judge at that time. I don't think that the behavior of two lawyers disrupts all that. But you know what, the court is going to decide that. We're pretty confident the settlement will stand. We'll see how it goes. But we've been aware of this for a little while now.

The European part of it, there are two or three things, too. One of is the actual announcement of the rules that are going into place, and you know that those are happening. The 20/30 will happen. The functional versus legal separation of scheme and processing will happen.

The co-badging will happen, and we're working with all that and we feel that we've got a good handle on all of those. The statement of objections, this covers two issues, and we were aware of this for a while. We've been engaged in a dialogue with the commission, and we remain so in an effort to seek a constructive resolution.

So the first issue they are tackling is the idea of interregional transactions and the interchange rates that are charged on inbound consumer cross-border transactions in an EEA from outside cards coming in. Now, in our total numbers, that's less than 1% of our total volume. But it's an important issue, and Visa Inc.

received a similar statement of objections from the EC, I don't know, three or four years ago, three years ago, and it's still sitting out there.

So I don't even know how long this will take to come through to any sensible resolution, but it's a discussion that's happening; that should ECB be getting involved with the interchange rates that a Singaporean, Indian, Australian, American bank makes when a consumer from there transacts in the EU with very different ticket sizes and implications than an European consumer transacting in the EU.

So we'll see where that goes. That is the work that's going on there. There's a second aspect of the statement of objections from the EC, and that has to do with cross-border rather central acquiring rules for the European merchants.

And that's what I'm going to be talking to them about because – how will that be constructive? For example, if you were to allow that to happen, would all acquirers move to one low-cost location and from there trend price down to a lower level, what would that mean for the banks and for the acquirers in other European countries? And so I don't know where it's going to go.

In the actual putting out of the rules, a couple of these proposals got dropped because different European countries found them less than palatable. So we'll see. It's early days. We'll see. But we have in our disclosure, as Martina is about to tell you, because I can see she's dying to say something, so I'm going to point it to Martina..

You've seen maybe numbers out there because in the SO you are seeing that the EC could be assessing fines associated with the SO, and it's far too early for us to be able to speculate on any numbers because there are many different ways that you can actually calculate them.

And quite frankly, if we were to reach a settlement with the EC, we would not be expecting any fine to be imposed. But there's really a third leg to the litigation in Europe, which I mentioned just in my prepared remarks, which is related to the UK merchant litigation.

And as you can see, we have been settling with Tesco, which is the largest merchant claimant in this litigation. We have been settling with them. We are pleased that that is behind us and so I think we are on our way addressing those issues there, too..

Europe is an interesting marketplace for us, but it's got really interesting complications in the way it's constructed. You know that. That's how we've been navigating there for years. And as a company, we have a degree of experience and expertise on the ground in Europe..

Thank you..

Our next question comes from the line of Craig Maurer from Autonomous..

Hi. Good morning. You spent a lot of time in your opening remarks talking about your Gateway globally. Visa made some very strong comments about the sustainability of PayPal's data disintermediation model and then backed it up with an investment in Stripe yesterday.

So I was wondering if you could comment similarly on how you view the long-term longevity of data disintermediation..

keep yourself open, play with all of them, find your company's best interests there and remain relevant in the value chain. That's what we're trying to do. PayPal is a client of ours as well, not just – as you've heard from many others, more than half of their float comes from the use of traditional cards of all our networks.

But in addition, their corporate cards, some of their small business cards is all with us as well. So I do see the fact that they do with ACH get around the networks and in a way around the issuer's compensation in that sense. That part I don't like.

If you remember, that's why we put out the digital wallet operator rules which, by the way, the other networks have yet not clarified on. And so we put that out for a reason, because we wanted the rules to be clear. And the rules have got to be that the brand of the issuer, the brand of the network has to flow right through.

I believe they prefer a transaction that's not staged, but it's flowed through. That's what Apple has done; that's what a lot of the other digital giants are doing. PayPal does it differently. Yet PayPal is a client as well. And I think the digital world is a complicated one where you've got to find your way to thread your needle through it.

That's what we're trying to do..

Is the two-stage wallet fee still in place?.

I'm sorry, is the....

The two-stage wallet. Yes, it is..

Okay..

Okay.

Next question, please?.

Our next question comes from the line of David Togut from Evercore..

Thank you. Good morning.

Ajay, could you update us on the SEPA debit processing pipeline?.

It's the same as usual, meaning it moves at the glacial pace that I'm used to in Europe. We're growing our SEPA transactions in the mid-teens. It's been like that, I would say, for a few quarters now.

We are seeing SEPA transactions – SEPA-based transactions, I don't want to call it SEPA transactions, we are seeing domestic transactions in a number of the European countries, actually in almost all of them. Growing in Germany, growing in Belgium. The ramp up in Netherlands was announced some time ago.

We're seeing some more transactions in France and Spain and in Portugal and Italy. All that's going on. Nothing new on that phase..

And in fact, David, when you really read the European legislation, that actually provides an opportunity for us to be expanding in SEPA processing more. Given what the merchants are looking at at this point in time, they will probably be accepting electronic payments more than they did.

Remember in Europe, many, many merchants, especially the small merchants, are not accepting that. They have a way of telling the industry in terms of where they want to route the transactions. And we believe that our processing business in Europe is very strong to be able to continue to take advantage of it.

But as Ajay said, this is not a revolutionary change ever. It's an evolutionary change and will help us over a long term to be increasing our business in Europe..

I think we've gone from what used to be high 20% of processed transactions several years ago to just under 40%. So that gives you a sense of how much time it took us to get from point A to point B..

This was from the beginning of 2008 until now. So about a six-year period..

Okay?.

Next question, please?.

Thank you very much..

Our next question comes from the line of Chris Brendler from Stifel..

Hi. Thanks and good morning. Can we talk a little bit about pricing? I think you mentioned a benefit in the prepared remarks. I didn't know if you could quantify it. It sounds like it's less than 100 basis points since it wasn't quantified.

And just going forward, we're seeing some degradation in the processed transactions, fees per transaction processed and domestic assessments. Is there a currency impact there, or do you continue to expect some degradation there? Any plans for any pricing would be helpful. Thanks..

Okay. So first of all, Chris, on pricing, this quarter we had really a very, very small impact on pricing, similar to last quarter. Very, very small. And you should not expect for this year a lot of pricing to be coming through on a net basis. In terms of what's going on transaction processing fee, there are two factors in there.

One is mix in terms of where it comes from and in which region the fees are actually generated. And, yes, you're right, local currency is impacting that, too..

Great. Thanks so much..

Your next question comes from the line of Bill Carcache from Nomura..

Thank you. Good morning.

Can you talk about whether you anticipate any kind of impact from the changes to AmEx's anti-steering provisions?.

I haven't seen anything yet. It's very early days. And clearly there's got to be some impact in terms of how merchants perceive it, but very early. I don't know yet..

Thank you..

Our next question comes from the line of comes from the line of James Schneider from Goldman Sachs..

Good morning. Thanks for taking my question.

Understanding it's still very early in the process with China, can you give us any sense at this point about the restrictions you might expect to be placed upon you in terms of limitations on regional operating or other market share restrictions that might prevent you from getting to full unencumbered market share potential in China over time? And if you don't have any sense on that, when do you think you might get more clarity?.

So to tell you to expect that you will not have restrictions and encumbrances would be to expect the wrong thing out of the way China tends to open up its businesses.

Based on many years of working with China, including my years in my previous job in Asia, they have always done this in a very measured, thoughtful way that allows local industry to both benefit from the influx of foreign money and technology, but also to actually protect itself in a way from that influx.

And it's been done very carefully over the years. I see no reason why they wouldn't be as thoughtful in this, which is a very important industry to them. So we will have restrictions. We will have encumbrances.

Already in the preliminary guidelines they've issued, which I referred to when I was speaking in (56:45) more by the end of the year, they've got ideas around what qualifies for domestic processing and what kind of data can and cannot leave their shores and how you would operate for clearing, authorizing and settlement.

And they've got ideas, but they're still at a stage where I don't know the detail of them. And finally in all of these, the devil is in the details.

We, because of our distributed operating structure a little different from other networks, may qualify for some aspects of our technology to be seen as more local than some of the others, but I don't know yet. It's all work in progress. But rest assured, there will be encumbrances and there will be some restrictions.

But it's an interesting marketplace still. It will be a marketplace that will evolve over a few years. Not only is it a question of getting processing set up on the ground in China, which we hope to be able to do by the end of next year for sure, technically, but it's more than that.

It's what kind of acceptance do you have outside of what used to be the high traffic tourist destinations in the big cities, which is where traditional foreign network acceptance was housed.

How do you get more issuers to be issuing these cards over the next period of time? So there's going to be a lot of work on issuing, on acceptance in addition to the processing. And part of what Martina talked about when she said we're going to start spending money this year is we see a two, three-year pattern of investing there.

All we're trying to do is to start getting ahead of that curve and start putting ourselves in a better position. So over the course of three, four, five years, we feel good about where we are in China. We feel good today. Today, as I said last time in my call, about half of the cards issued, they are with us, but half are with our largest competitor.

It wasn't that way five years ago. We've got a decent position. But you know what? Compared to China UnionPay's own branded card, we're all tiny and there's a huge opportunity in that system over a few years to come..

Thank you..

Operator, I think we have time for one last question..

Certainly. Your last question comes from the line of Bryan Keane from Deutsche Bank..

Hi, guys. Thanks for fitting me in. Martina, maybe you could just talk a little bit about expenses and operating margin. I think non-GAAP operating margin was 54.9%. I guess I'm curious to know if that was in line with your expectations.

I know the Street was look for something higher, and I know before you've talked a little bit about some of the mis-modeling by the Street. So maybe can just address that. Thanks..

Actually, operating margins were completely in line with expectations that we had internally, in fact, a little bit better because we were able to reap more savings from our restructuring that we had started earlier this year than anticipated. And also, the M&A activity that is on the OpEx line was actually right on with our expectations..

Okay, I think that's it for Q&A.

Ajay, do you have some closing comments?.

Sure. So thank you all for those questions, and I'm going to leave you with a couple of quick closing thoughts. I guess the business continues to perform well in what we find to be a challenging global economy. The U.S. and Europe, as I said, seem to be improving. Asia and Latin America have a few market issues.

We are going ahead and executing on strategy. We are investing in new technology. We're investing in other services both organically and through acquisitions, and we did have a couple of questions around that in the last half an hour. We are clearly seeing the benefits of these acquisitions in our business engagements.

We continue to expect to have increasing opportunities to bundle that capability with our existing products and services. And as Martina mentioned, we're managing our organic expense growth to fund those integrations.

I hope many of you will come along to attend our Investor Day in September in New York, if nothing else, to get a selfie and check that your transaction goes through.

But you will also have the chance to hear more about strategic focus areas and hopefully experience some of these innovative products and services, a couple of which got mentioned on today's call. Mostly, we appreciate your continued support of our company and all of us and thank you so much for joining us today..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..